Saturday, May 30, 2009
By TOM ALLIO and BILL FAITH
A year ago Tuesday, Gov. Ted Strickland signed the Short Term Loan Act that capped the annualized interest rates payday lenders could charge at 28 percent, down from 391 percent.
Today, payday lenders are celebrating all the way to the bank, using loopholes in the law to charge up to 680 percent APR.
They’re living it up, trapping customers in deeper and deeper debt with their trademark one-two punch: excessively high interest and short repayment terms. Not even the people’s vote would stop them.
You remember; after the governor signed the rate cap law, the industry spent $20 million of its enormous profits to “let the people decide” at the polls last November. By a margin of nearly two-to-one, Ohioans voted yes on Issue 5 to uphold the 28 percent rate cap law.
First our elected officials spoke, then the people of Ohio concurred. No more debt trap, right? Wrong.
Only 19 of the 1,000-plus storefronts statewide licensed themselves under the Short Term Loan Act. The rest opted for licensure under Ohio’s Mortgage Loan Act and Small Loan Act. Both statutes were designed to regulate other long term lending products, like second mortgages; neither was intended to regulate a short term product like a payday loan.
Under these statutes, payday lenders got very creative. They started issuing loans in the form of a check, then charging the customer to cash the check; started charging origination fees — in addition to interest and other fees — as often as every week. Loans bulging with add-on fees sent interest rates through the roof, up to 680 percent APR. The Housing Research and Advocacy Center confirmed all this in a March 2009 report titled, “The New Face of Payday Lending.”
Greedy industry
The new face of payday lending funnels money from the needy into the vast coffers of a greedy industry. It mocks the system that tries to regulate it. It thumbs its nose at the will of the people. And except for even higher rates and fees, the new face looks a lot like the old face.
It lures borrowers with the promise of easy, fast cash, then traps them with excessively difficult repayment terms. Borrowers don’t choose to return again and again. They do so because they’re trapped; and borrowers trapped in debt cannot save or invest or contribute productively to a healthy free-market economy. It strips wealth instead of building it.
Ohio has seen enough wealth-stripping from the foreclosure crisis. We don’t need more bad lending products that promise one thing and deliver the opposite. And we certainly don’t need a deceptive industry sidestepping the law to continue the carnage.
Let’s stop “loophole lending” with legislation that tethers all loans for under $1,000 and for less than 90 days to the 28 percent annualized rate; that prohibits charging a fee to cash the loan check; and that gives the Attorney General authority to go after lenders who attempt to skirt the law.
The people spoke clearly in a historic referendum last November. Ohio’s public officials have been delivered a clear mandate to address abusive payday lending practices.
Legislation that effectively closes the payday loopholes should be passed through both chambers and signed by the governor as quickly as possible.
Nothing less than the integrity of the Nov. 4, 2008, vote of more than 3 million Ohioans is at stake.
X Tom Allio is chair of the Ohio Coalition for Responsible Lending and Bill Faith is legislative chair for the coalition, which advocated for restrictions on interest rates charged by payday lenders.